What is Outsourcing?

What is Outsourcing?

Introduction

Outsourcing is the process by which a company contracts
another company to provide particular services. These
services/ functions would be otherwise carried out
in-house, by the company’s own employees. Outsourcing is
becoming more and more popular in today’s business
environment, and most companies outsource some work or
other.

Call centre services, payroll, maintenance etc are some
of the kinds of work typically outsourced. Generally,
companies outsource functions that are non-core to their
business. The firms that outsource work are known by the
terms client and buyer.

The firms to which work is outsourced are known
variously as vendors, third-party providers or service
providers.

Advantages of Outsourcing

There could be several reasons why companies outsource
work. But the foremost reason is the money it saves.
Many service providers can offer to get the work done at
lower costs, as they have fewer overhead expenses and
perhaps operate in a different economical environment.

In outsourcing, it is often narrow functions such as
payroll, data entry etc that are given to specialist
vendors. These specialist companies can therefore do the
work more efficiently as they have specialized tools,
facilities and personnel trained for that particular
kind of work.

When a company outsources peripheral work, it is able to
concentrate on core business issues. The details are
taken care of by specialists, and the company’s own
management professionals have more time and resources at
hand for working on the most crucial issues within the
company. Outsourcing is also an excellent option to a
company that plans to expand geographically, as the
company can start its operations in a different country
more inexpensively through a local provider.

Different Kinds of Outsourcing

There are several different kinds of outsourcing, based
on the nature of work outsourced. As we saw earlier,
some companies tie up with service providers for narrow
functions. However it is also common these days to
outsource entire operations. This type of outsourcing
can be placed in two broad categories, namely
Information Technology Outsourcing (ITO) and Business
Process Outsourcing (BPO). Business process outsourcing
can again be sub divided into call centre outsourcing,
human resources outsourcing (HRO), finance and
accounting outsourcing and claims processing
outsourcing.

When entire operations are outsourced this way, the
contract can run into millions and billions of dollars.
It is common for the client’s employees to be
transferred to the vendor company. Companies like IBM,
HP, EDS and Accenture are some of the leading service
providers in the outsourcing business.

The Process

A company outsourcing work goes about the process in
four stages. As the first step, it has to develop the
strategy for outsourcing. This means that the company
has to first of all identify its business case for
outsourcing, and also have a clear idea of the role of
outsourcing in its business. The next step is to
evaluate potential service providers and decide on
projects and locations. Contract development comes as
the next step, where the buyer and vendor negotiate and
settle on legal, pricing and service level agreement
terms. The outsourcing contract is on from this stage,
and in the fourth stage the buyer has to manage the
outsourcing relationship.

Successful Outsourcing

Whatever the business case, the success of an
outsourcing relationship depends on the following
factors. The client organization should have set up
proper executive-level support for the outsourcing
project. It should also have ongoing communication with
both the service provider and in-house departments and
personnel involved. It is also important to manage the
outsourcing relationship with the service provider along
the right track. And last but not the least, both the
client and vendor should allow for flexibility to
accommodate changing business needs.

Challenges and Problems

A standard challenging situation in outsourcing is
offshore outsourcing. Language, culture and time zone
can all create problems.

With outsourcing, sometimes a company loses direct
contact with its clients, thus preventing it from
developing lasting customer relationships. Delayed
communications or implementation is another potential
trouble zone. These render the company in a situation of
being in less control than desired. Also, sensitive
information may become more vulnerable when third
parties are brought into the picture.

With both benefits and disadvantages in the picture, it
is important that a company evaluates and assesses its
needs and situation before joining the outsourcing
bandwagon.

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